If there’s one aspect of financial planning that has the potential to impact your business value massively, it is financial planning and analysis or FP&A. If executed poorly, financial planning and analysis practices can drive negative ROI, reduce commitment and ultimately lead to poor results for your business. On the other hand
To put things in perspective, let’s discuss a few ways in which effective Financial Planning and Analysis can drive business value. The first and perhaps the most crucial way FP&A processes can help your business is that it drives the execution of strategy and helps deliver the mechanisms required to ensure a business’s financial milestones are achieved.
Moreover, proactive Financial Planning and Analysis allows the ideal allocation of resources and promotes organizational awareness of the business strategy by detailing every stakeholder’s role in achieving it.
However, the challenge that many business face is that they are not armed with practical insights to ensure optimal Financial Planning and Analysis. This is why here we discuss a few actionable tips and principles of best practices that can help your business execute effective financial planning and analysis.
But before that, let’s answer a simple question – what is financial planning and analysis (FP&A)?
In technical terms, financial planning and analysis refers to the budgeting, analysis, and forecasting of the various operational activities of a business that play a role in improving or harming its financial health. This makes it an incredibly crucial business practice and hence vital to get right. With the help of the following points, businesses can ensure that they get the best results from their FP&A practices.
Businesses with the best FP&A processes strive to synchronize financial and operational planning. In other words, a business should recognize its most profitable assets and find ways to leverage them in its operational strategy.
To take a simple example, if a service providing business recognizes its most profitable service and devices operational strategies to promote that service in order to meet its financial goals.
While this might sound obvious, it puts light on the fact that financial planning and operational planning go hand it hand. In fact, financial goals without actionable, operational plans to achieve them are of no practical value.
Several well-thought-out plans fail to reach their end goals due to a lack of resources. This includes both money and time. This happens when those leading or formulating the plan do not consider the resource requirement of the plan.
Another common shortcoming is that the budgeting and resource allocating process is not executed along with the strategizing process.
Businesses with optimal financial planning and analysis recognize the kind of resources needed for the execution of a project and incorporate these requirements into the budget.
Organizations with effective financial planning and analysis practices recognize that their ongoing operational activities have a role to play in their financial results. This is why they regularly monitor their operational plans and assess whether they are working on track and delivering the expected results.
These reviews also assess vital projects to make sure that they are running on schedule and deliberate on business explanation for delayed projects.
While it’s always desirable to have no plan-to-actual financial difference, these can offer valuable insights into what’s working and what’s not working with the business in case such differences occur.
Businesses with best performing financial planning and analysis practices are agile in identifying the reason behind the plan to actual financial difference and identify practical business reasons for these differences.
For instance, a business aimed to grow revenues by 10%, but due to a failed marketing campaign, could not achieve these goals. A business with well-functioning Financial Planning and Analysis practices will dive deep into this incident and identify the root cause behind this pitfall. This will help avoid such issues in the future.
Instead of altering their goals, businesses with optimal financial planning and analysis practices make real-time adjustments in their financial and operational plans. Gaps between where a business should be and where it really is should ignite a conversation about what needs to be done differently to get back on track.
Needless to say, this requires a deep understanding of the operational ground levels and may even need financial planning and understanding tools. However, these tools aren’t self-sufficient and need to be operated by certified FP&A professionals.
Businesses with effective financial planning and analysis practices hold their people responsible for achieving financial targets and might also link these successes with financial incentives. These businesses have a clear idea of who’s delivering which part of their overall financial target and hold these people directly accountable for driving those targets and reward them for their success.
This way, businesses can align the employees professional goals with the goals of the businesses.
Organizations need to have a clear idea of what drives their business and have straightforward ways to measure those drivers. This way, they can understand what they need to focus their efforts on and what can run on auto-pilot.
It is essential to have both long-term and short-term KPIs while measuring the performance of these drivers. This can help in establishing a path between where a business is today vs where they wish to be in the future.
While these practices might seem straightforward, they can be overwhelming if you don’t have a hang of them. This is why it is a good idea to take professional guidance when it comes to FP&A practices.
We at TRC Corporate Consulting offer a wide range of financial planning and analysis services that are tailor-made to suit your business needs. Our certified FP&A experts strive to deliver quality insights that can help you take your business to new heights and meet your financial goals. Contact us to know more about our services.